China and the World of Business • China Business and the World

Over the last two decades, I have watched China’s allure overwhelm the reasoning powers of a battalion of intelligent, experienced, and successful executives. I have seen massive companies enter the market on the thinnest of pretexts without bothering to identify and evaluate the opportunity first. And in some cases I have watched, helplessly, as great companies and captains ignored good advice and their own common sense in the dogged pursuit of a billion customers.

There is something altogether too enticing in the image of a great leader, impelled by nothing more than animal drive and gritty determination, ignoring his counselors, spitting in history’s face, and in the end accomplishing what others said was impossible. If that self-conception proves too seductive for a baron of industry who bears the scars of five decades of experience, it must be irresistible to a twenty-seven year old billionaire CEO who has succeeded at almost everything he has attempted in his life thus far.

I suspect that this and perhaps pressure from investors is what draws Facebook to China.

Motivations notwithstanding, if Facebook has made the decision to enter China, all that is left is to offer advice that may smooth the path ahead. The obstacles ahead of Facebook are formidable, and I enumerated many of them yesterday. While there is nothing Facebook could do to guarantee its success in light of those obstacles, there are steps it could take to improve its chances for success in China, should it decide to take the plunge.

At the top of the list of those steps are the following:

1. Explain exactly what you plan to do. To everyone. The largest risk to Facebook is the potential of a backlash from users and censure by U.S. lawmakers for complying with Chinese requirements to control content and provide user information on request. Google has been through that storm, and it is hard to see how Facebook can avoid it.

What Facebook can do is eschew Google’s approach, which amounted to ignoring the potential for a problem in the hopes it would never become an issue. We all saw how that turned out, and what Facebook must do is tell its investors, its users, and the public how it plans to operate in China and why. It has to assess, plan for, and communicate in preparation for the worst case scenario. And it has to be completely open with its users in China that it will hand their information to authorities on request.

Further, Facebook needs to explain how it is going to secure the personal information of users around the world from the prying eyes of Chinese hackers, whether they are simply rogue electrical engineering majors with nothing better to do or in the employ of the national government. Information released around Google’s departure from China has left the impression, right or wrong, that servers in China are something of a huge trojan horse. Facebook needs to tackle that head-on.

If the company cannot take those steps and publicly defend its approach in China today, better to avoid doing business in China altogether.

2. Build a local service from the ground up. Websites and online services that are transplanted wholesale from the US to China are doomed to die in the alien cultural soil. Facebook China should not be Facebook in Chinese, but a service that grows and evolves naturally out of Chinese culture the way MySpace grew out of the US collegiate music scene and Facebook itself grew out of American university culture. That means that Facebook in China may look nothing like Facebook anywhere else, and everyone needs to be comfortable with that.

That doesn’t mean throwing out everything that’s been created elsewhere. It means letting user preferences and local conditions dictate the thousands of little choices about what to create and how it should look, rather than allowing those decisions to be dictated by what was created elsewhere.

3. Move Mark Zuckerberg to Beijing. As I said at GMIC in 2010, there is no way any foreign web company can beat a local competitor in China, because the guy running the local competitor is here, and the foreign competitor’s boss is between 6,000 and 8,000 miles away. If Facebook is serious about China, the company should yank the CEO out of his apartment in Palo Alto and drop him into a 4th floor walkup in Haidian for at least a year if not two.

Zuckerberg’s job will not be to create the site, but to enable the team on the ground, to keep the company’s resources at hand, to provide quality control, to give the authorities comfort, and to learn what it is like to do business in China’s internet industry. And please, no objections about how he cannot run Facebook in the US while sitting in China. He’ll have a much easier time doing that than trying to run Facebook China from Palo Alto.

4. Find The Guy/Girl. Facebook needs a local CEO to be the chief site visionary and to actually create the service. The foreigners – even the overseas Chinese – cannot do it. Facebook China needs to be local down to its core, or the results will be disappointing. This will be one of the most important hires in the company’s history, and the individual needs to be selected with great care.

That person probably should be fluent in English, have SNS leadership experience, should be a coding monster, and be a natural leader in a Chinese context. And be ready – he or she will be expensive. But Facebook will fail without him or her.

5. Get a great Chinese name. If they can’t say your name (and say it without laughing at the dumb foreigners), they won’t use your service. Facebook needs to hire a locally-wise branding agency in Beijing to come up with a brand and test the hell out of the name using a great marketing research firm. The name should reflect what the service is about, and Facebook’s leaders shouldn’t worry if it they cannot pronounce it or it doesn’t sound like “Facebook.” They just don’t want to wind up with a name like feici buke (非死不可).

6. Think lean. The easiest thing to do to a China startup is to drown it with too much cash. The funds should be there when necessary, but the offices should be inexpensive and things kept as lean as possible. Great sites and great code come from people who are improvising because they cannot afford to throw money at a problem. Facebook China should forget fancy offices, company cars, and Herman Miller furniture. Replicate the dorm-room mentality, forge a tight team, and spend money on talent, IT, and the stuff that will show up on screen. Zuckerberg should take a taxi to work, or a simple Volkswagen Santana with a bodyguard.

7. Forget revenue – for now. The China service should replicate the Facebook growth story – forget revenues for 2-3 years while focusing all efforts on experience and scale. Having to go out and sell ads is a monstrous drain of senior executive time right when the focus should be on forging the product. Build something great, and the advertisers will come to you.

8. Get humble. Facebook China needs to talk and play like the underdogs, be grateful to be allowed the opportunity, and learn to be superb listeners. The company’s success overseas only buys them a skeptical reception. The way to overcome all of that, and to create a successful company and a lot of goodwill, is by personifying humility at every step.

That also means eschewing the limelight. The first temptation will be to throw a big press conference at every milestone, starting with a big announcement of the company’s decision to enter China. Facebook has to resist that temptation. Expectations and awareness will already be high enough. Speak softly and create a superb service.

9. Play clean. There is a double (maybe a triple) standard for companies in China. There is one set of rules for state-owned enterprises, one set of rules for private companies, and a third set of rules for foreign companies. Foreign companies have to operate with greater integrity, transparency, and care than local companies do.

For this reason, Facebook needs to operate in China as if it was in the United States and being simultaneously investigated by the FBI, OSHA, and the EPA. Doing otherwise will give the competition and the government an perfect opportunity to prove that Facebook is a scofflaw company at best, and at worse subversive. Facebook cannot afford the distraction of government harassment.

I could go on, but these are the most important steps Facebook needs to take right now, some of which need to be done before setting up shop in China.

I will be watching with great interest to see how many of these Facebook decides to follow.

Tomorrow, a post on the moral question of Facebook’s entry into China.

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10 Comments

I have to disagree with nearly the entire list for several reasons, the only real good point being number 5: Chinese name is an advantage.

Fact is: Facebook is popular in most parts of the world, in many places being ranked top social media site and constantly amongst the top sites visited for the whole web. This does not only apply to the US and other English speaking countries. One of the reasons I believe to be true is that the site operates in the same way for all users while still offering a localisation. True, it is easier to grasp the concept if you have been using FB for some time and grown with it and all it’s new features. However, Facebook ist still growing and winning new active users in all geographic regions and especially all age groups. It is usable for all in it’s current state.

I also believe that the main reasons, also contradicting your earlier post on the topic of foreign internet services in China, i.e Facebook, failing, is simply censorship and restrictions. This may sound like the typical excuse, but I do think this is the main reason, not just for Facebook (others that spring to mind are Flickr, Youtube, … and even Google itself).

Fact is that a site that is inaccessible for large parts of the Internet users in a country is and will stay very rarely used. Instead you will have a lot of popular local clones. I don’t think this is due to “cultural context” or where the main CEO is based, just plain and simple access to the site.

The censorship issue also takes a heavy effect on marketing: Facebook, Youtube and many other social media sites and services are spending large amounts of money for marketing activity, including PR. To spend vast amounts of money in a country where the site isn’t even accessible would be crazy.

Another effect of the GFW is of course Internet speed, many foreign sites lack the server infrastructure in China to be able to serve their users at a decent speed. This is a huge disadvantage.

To finally try and answer one of the side-questions raised: Is it too late for Facebook in China? Not in general, but considering the general environment for internet companies in China: probably.

I also believe that the main reasons, also contradicting your earlier post on the topic of foreign internet services in China, i.e Facebook, failing, is simply censorship and restrictions. This may sound like the typical excuse, but I do think this is the main reason, not just for Facebook (others that spring to mind are Flickr, Youtube, … and even Google itself).

I am afraid that the historical record suggests otherwise. AOL was here twice, no blocks, a powerful and supportive local partner, and it failed. Yahoo failed not once, not twice, but three times in China, having never been blocked and in spite of close cooperation with the government; MySpace crashed and burned despite offering the same service as abroad, local servers, no latency, no blockage. Facebook had an opportunity before blockage and never took it. Shall I continue? I do not defend the Great Fire Wall, but I think it is used far more often as an excuse than it warrants. For Twitter and some others, blockage has not helped, but it is worth noting that Flickr, YouTube, and Twitter had largely ignored China before they were blocked.

The censorship issue also takes a heavy effect on marketing: Facebook, Youtube and many other social media sites and services are spending large amounts of money for marketing activity, including PR. To spend vast amounts of money in a country where the site isn’t even accessible would be crazy.

Spending marketing and PR dollars in a country where you are blocked is, indeed, foolish. But again, explain to me why foreign internet services that were set up in China and were not blocked subsequently failed, despite extensive marketing and PR?

Another effect of the GFW is of course Internet speed, many foreign sites lack the server infrastructure in China to be able to serve their users at a decent speed. This is a huge disadvantage.

As an aside, latency is such a common problem in China that I’d argue many users have simply grown accustomed to it. If Facebook is a superior service (and I use it via a VPN), a bit of delay should not stand in the way. That said, it is always preferable to have your servers close to your customers, and as mentioned above, many foreign sites have put servers in China, only to find that it did not make them more relevant.

What do you think are the Chances Zuckerberg will move to China? Ok, while you’re pondering that I’ll say this: this sounds like a way for you to come back, 3 years later, after Facebook has failed, to point to one of the many things they didn’t do, which you suggested.

It’s almost certain that they won’t do this (eg, asking them to pick a local ‘leader’ and turn Facebook into something different than Facebook, sounds like you want them to kill FB or hand it over to the Chinese) so you’re almost certain to get this “I don’t you so” card anytime FB has problems adjusting to Chinese culture.

What are you going to say if FB succeeds? You’ll probably latch on to one or two of the things they did do (from this list) and say you predicted it. Brilliant.

You may not understand this, Michael, but saying “I told you so” gets tiresome, as does hearing it. I promise: if Facebook doesn’t come to China, or comes here and fails, you will not get an “I told you so” post from me; If they succeed, I will publicly confess on this site that I was wrong to urge them not to come to China, and that the people from Facebook are much, much smarter than I am.

Okay?

I wrote these posts not so that I can sprain my shoulder patting myself on the back a few years hence. I wrote them for two reasons. First, because I genuinely believe Facebook to be a fantastic company, and because I believe that their return-on-investment in China will be lower than if it focused the same limited resources on making the service more valuable to people in places where it doesn’t have to fight city hall just for the right to operate.

Second, I wrote them to illustrate that for a growing number of companies it makes more sense to stay out of China at this time than to enter the market. To borrow an old Soviet term, the “correlation of forces” is shifting against foreign companies here, not least in the internet sectors, and corporate decision-makers ignore that at their own peril. If you accept those challenges, you have to be prepared to take extraordinary measures to ameliorate or offset those challenges.

Finally, I have never had any problem admitting I was wrong, and I have made some bad calls along the way. A few that jump to mind: my early belief in the forward momentum of China’s media regulatory reform has withered in the face of persistent orthodoxy; my verbose 2006 critique of Rebecca MacKinnon’s report for Human Rights Watch was over the top, particularly in light of what today seem mostly mild recommendations; and two posts that I wrote, one on NGOs and one on high tech in agriculture, taught me the importance of backing up strong opinions and good ideas with a little research prior to hitting the “publish” button.

As I’ve said, I’m happy to eat crow if Facebook succeeds here. And I wish them nothing but the best, regardless of their decision.

Hi. One of your points was that Zuckerberg move to China. I lived in China, and i think i therefore understand the mentality of placing so much importance on China. However, the drawback of a sinocentric mentality is that rarely is there a international viewpoint of such a mentality. Therefore, i think you are overplaying the importance of China, and the fact that a company like Facebook is an international company. Putting Zuckerberg in China for a year (a lifetime in internet terms), would be disastrous in terms of Facebooks development and its international (not just Chinese) market presence. Its a mentality that i came across a lot when i was in China (from 1998 to 2005), that really overplayed the importance of China, at the current time, in the world.

Hi Ash, thank you for your points. I agree it is possible to develop a China-centric mentality when living here. Where I see that happen most often is among those whose responsibilities or academic focus are entirely on China. May I suggest, however, that there is a difference in effect when one retains wider regional – indeed, global – responsibilities while here. Zuckerberg would continue dealing U.S. and worldwide issues on a day-to-day basis, yet he would build a radically enhanced understanding of this market as a result of his spending a year or even two in China. I am not sure I would leave him here for much longer than that.

Further, it has been my experience that an American executive taken out of his/her market and placed in a foreign country for a 1-3 year tour actually develops a more nuanced view of ALL global cultures. Given that Facebook’s long-term growth (and, I would argue, the eventual majority of its profits) will come from outside of the United States, if anything Zuckerberg et al face the danger of being too “America-centric” unless they take bold steps to globalize their thinking. But I don’t think a 12 month relocation would cause him to “go native.” What I would suggest is that after 12-24 months in Beijing, they should move him to London, not Boston or the Valley.

Your predictions of disaster are well said, but I think they might be overstated. Macedonia did not collapse when Alexander was tromping around the Hindu Kush, and he didn’t have email, conference calls, and the occasional first-class flight back to HQ. You can run a global company from anywhere these days: NewsCorp’s Australia ventures didn’t implode when Rupert Murdoch became an American citizen.

It is not that I am overplaying the importance of China. On the contrary: I suggest that Facebook is doing so by even considering this venture. Facebook does not need China, and it would hurt its prospects not one whit to bypass the PRC in favor of markets were it could secure quicker, larger, and more lasting gains. I suspect Zuckerberg and his team actually agree with this. The more I dig into this situation, the more I get the feeling they are considering China to appease investors and a small handful of advertisers who are dangling the prospect of global ad buys in front of them.

Facebook must consider that its competitors are focused on China, from the CEO level all the way down. The competition is smart, understands the Chinese netizen far better than China, is well-funded, well-advised, and have built strong relationships with advertisers and users. Success here, if that is what Facebook truly wants, demands that Zuckerberg lead from the front.

Thanks for the reply, David. In that case, if international expansion is of such great importance to Facebook, why China? Wouldnt India be a much better proposition for Zuckerberg to go for a year? India has a roughly equivalent market size, big English speaking population and none of the political risks that China poses. i understand that in terms of GDP and maybe, internet market penetration, China might have the upper hand – but wouldnt the advantages of greater expansion into India (and i dont know the statistics for Facebook use in India im afraid), be a much safer and an equally lucrative bet.
Im not saying that i believe this – but is one of the reasons that China is being considered so much, only because they block facebook there and so Facebook wants what it cant have, rather than the relative merits of market access vis India?
Im afraid im playing devils advocate a little here – as i do see the relative merits of and potential success of China market entry, but kind of wary of the political ‘game’ that the Chinese authorities seem to play with foreign companies which is often of no benefit to the company and much political risk to, particularly internet companies in China – e.g. Yahoo.

You are preaching to the converted, of course. While I think everything I wrote above would improve their chances of success in China, everything I wrote here and the concerns expressed by Will Moss, Bill Bishop, and Gady Epstein (among others) leave me convinced that they would expend a great deal of effort, money, and executive attention for returns that would be modest at best. At worst, of course, their efforts could come to naught in China and incite a backlash among users elsewhere.

I think, like you, that there are greener pastures for FB elsewhere in the world. I think that should be obvious. And it appears they are not even agreed internally about whether or how to tackle China. You have to wonder if they are being pushed into this by their investment bankers in order to have a “truly global” story to tell prior to their IPO.